About Flat Fees

“Show me the incentives and I will show you the outcome.” – Charlie Munger, Berkshire Hathaway

We believe that Flat Fees are Fairer Fees. Fairer than % fees. Fairer to the client and also fairer to the adviser (albeit often lower). So why is the majority of advice in the UK charged for using percentages? If Flat is Fairer why is it still less than 1% of the market?

Percentage fees make more money for financial services and therefore there is an inbuilt incentive for the profession to defend this position at all costs. Much like the tobacco marketing of the 1950s, defending percentage charging is an exercise in distraction magic. A case of, ‘look over there at that thing’ rather than addressing whether there is a positive case to be made.

So what are the advantages for you as a client in opting to pay a flat fee?

1. You will have a clear idea of what you are paying (this is called saliency and is well explained here from 9mins20secs onwards).
2. You will be paying the same as other clients and receiving the same service.
3. You and your adviser’s incentives are aligned, they are paid to give you the advice that you need and the payment for that advice isn’t impacted.
4. You will find that % charging in the market has clustered around 1% of your wealth, with Flat Fees you can pick the firm who will offer a Flat Fee that is at the right level for you and your money.
5. You will find that paying a fee priced in £, encourages you to be more active in working with your adviser (it is the positive side of the sunk cost fallacy).
6. Your adviser is more likely to be focussed on serving clients like you, rather than taking on anyone and everyone and then not having time for you (this is why Flat Fees are also Fairer for advisers as it helps them to focus).

So what are the issues with percentage charging (hint: it is all about bad incentives)?

1. If your adviser charges a percentage of your money to advise you, it is likely that you won’t understand the true cost. Don’t just take our word for it, there has been plenty of research into why humans don’t compute percentages.
2. If your investments rise every year with the markets then so does your adviser’s income and this should be comfortably above inflation on average. There are very few professions that get away with increasing their fees faster than inflation.
3. If the right advice is for you to; pay down debt, hold cash, gift money to family – your adviser is taking a pay cut to give this advice. Your adviser might do the right thing but you can see that your incentives are not aligned with your adviser’s.
4. If your portfolio is smaller than your adviser’s average client then he/she will have an incentive to spend less time looking after you than average so that they can still make a profit on you (many % based firms are actually losing money on their smallest clients).
5. If your portfolio is larger than your adviser’s average client then you are probably paying more than other clients for the same service and cross subsidising your adviser’s smaller clients (no one knows to thank you and you can’t even claim GiftAid on your support for these other people).
6. Finally, who else do you pay a % to for a service? An estate agent? Even they only charge a percentage of your house initially, imagine if they asked you to pay a percentage every month you own that house.

So finally, are Flat Fees always the best?

No, not in every case. If you have a portfolio that is rapidly shrinking due to withdrawals (nothing wrong with this – you are probably just enjoying life), then a flat fee will accelerate that decline in value as it will become a ever bigger cost as the pot shrinks. It will act like a percentage fee that is growing rapidly. Of course in this sort of scenario the % based adviser will be seeing a rapid fall in her/his income as the portfolio shrinks and so that is still not necessarily a solution.

Investment Calculator

Our Percentage Fee vs Flat Fee calculator is here to help you determine how much could you be saving in fees.

*If you are using our calculator on a mobile device, rotate your screen so that you are viewing in the landscape position.